The Supreme Court of New South Wales has held that the powers given to the Commissioner by Pt IIB Div 3 of the Taxation Administration Act 1953 (TAA) to maintain a running balance account (RBA) for a taxpayer, and to make adjustments to the RBA in respect of tax credits and debits arising, are available to the Commissioner even where the taxpayer is a company in liquidation, where the adjustments relate to transactions which took place prior to the winding up.

The court also found that debits made by the Commissioner against a tax credit in the company’s RBA were not void as “an attachment, sequestration, distress or execution” put in force against the property of the company within the meaning of s 500 of the Corporations Act 2001 (Cth). Certain debits in the RBA were, however, on the facts in the case, found to be beyond the Commissioner’s powers under the TAA and were refundable to the company.

The company was in voluntary liquidation. The liquidator lodged income tax returns for the company, and paid tax accordingly. Subsequently, the liquidator lodged an amended return which reduced the company’s tax liability for the year in question; the amendment involved reducing the amount of capital gains tax payable by the company to correct an overpayment. The Commissioner credited that amount to the company’s income tax account. The Commissioner then made a series of five debits against the credit amount, in respect of income tax withholding and GST, income tax, and superannuation guarantee charge.

The company’s liquidator argued, firstly, that the powers that the Commissioner purported to exercise under Part IIB Div 3 of the TAA were not available once a liquidator had been appointed to the company, and the special rules in Subdiv 260-B of Schedule 1 to the TAA about collection and recovery of tax from a liquidator apply in that situation. The Commissioner replied that s 8AAZL of the TAA and either ss 8AAZLA or 8AAZLB required him to apply each of the debits against the credit amount, and that there was no reason to read the provisions of Pt IIB Div 3 of the TAA as subject any limitation, not expressed in them, which would have the effect of denying their application where a credit or RBA surplus arises in respect of a company in liquidation.

The court held that the determination of the net position as between the Commissioner and the company, having regard to all of the various tax accounts maintained by the Commissioner in the light of the returns lodged by the company and the liquidator, did not involve any disruption to the proportionate system set up by s 260-45 for liquidation, or any inconsistency with a pari passu approach, where the result would be that the net amount owing to the Commissioner would be proved in the liquidation, or (as in this case) the total balance owing to the company would be paid to it. The set-off of different accounts maintained by a party dealing with an entity in liquidation has long been recognised as consistent, rather than inconsistent, with the policy underlying a winding up.

The liquidator also argued that the debits were an attachment, sequestration, distress or execution put in force against the property of the company within the meaning of s 500 of the Corporations Act, and that each of the debits was void within the meaning of Pt 5.5 of the Corporations Act, and that the Commissioner should pay the amount of the debits to the company. It was contended that the company had a chose in action to recover the money paid by way of overpayment of its income tax liability, and that chose in action was property of the company.

The court held that any chose in action of the company could be for no more than the amount derived by the proper application of the statutory scheme, having regard to any amounts owed by the company to the Commissioner. The credit amount was not “property of the company” for the purposes of s 9 of the Corporations Act until the Commissioner had made the allocations or applications he was required (or at least entitled) to make under s 8AAZL of the TAA, and the “property of the company” for the purposes of s 500 of the Corporations Act was only any excess or residue which remained after those allocations or applications. Under s 8AAZLF(1)(b) of the TAA, the only amount which was required to be refunded to the company by the Commissioner was the excess non-RBA credit in the company’s favour which existed after the process of allocation or application of the credit under Pt IIB Div 3 of the TAA, if that allocation were undertaken in accordance with that Division. The company had no more than a right to seek relief to require the Commissioner to perform his duties under Pt IIB of the TAA, prior to the point at which the relevant allocations had been made so as to determine an amount payable to it.

Further, the power to allocate or apply a credit or RBA surplus under s 8AAZL of the TAA does not bear any of the characteristics of, and is not analogous to, the enforcement of a debt, whether by way of garnishee, seizure, sequestration or otherwise. The steps taken by the Commissioner did not amount to either sequestration, execution, where no judgment of the court was involved, or distress.

In the event, however, the court held that certain debits made by the Commissioner against the company’s credit amount were not authorised by Pt IIB Div 3 of the TAA, on a narrow basis that largely resulted from the Commissioner’s admission that the income tax account was an RBA account.